Gary North on Deflation and the Gold Coin Standard

Dr. Gary North recently wrote a good article exposing yet another absurd attack on the gold coin standard. While there were no new arguments in the article, North did pose an interesting way to think about deflation that I had not seen before. He writes:

Economic theory teaches that economic growth reduces the effects of scarcity. A world without scarcity would be a world where demand and supply balance at zero price. Therefore, when there is economic growth, we should expect to see a world in which consumer prices are falling in the direction of zero prices.

What a wonderful use of a reductio ad absurdum argument and a reminder of the central role that the concept of scarcity plays in economics.

North also reminds us that the computer industry has experienced real price deflation for decades, yet continues to expand. Says North:

So, prices tend to fall under the gold standard. The horror! Why, the whole consumer price index would begin to resemble the cost of computing: ever less expensive.” [1]

This is the empirical bugaboo that opponents of sound money never seem able to dismiss.

As a final note, let us remember that North is referring to deflation under a gold coin standard without fractional reserve banking. Thus deflation is a necessary consequence of an expanding economy, assuming no enormous gold discoveries, not the destruction of fiduciary media. This distinction must always be kept in mind when talking about deflation. So we define deflation as an increase in the purchasing power of gold money.

[1] Note that North is referring to the mythical price level as a metaphor. He is well aware that there is no such entity as a price level. See here for a detailed explanation.

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